1. Invest in opportunity Zones

Investing in these funds offers the following tax incentives:

• Capital gain deferral

• Potential reduction of the amount of gain realized through a basis adjustment

• Potential permanent gain exclusion of the appreciation

There’s no cap on how much money can be invested in opportunity zones. As time goes by, investors get preferable tax treatment on the profits from these new investments, and after 10 years, additional capital gains are tax free.

Properties in underdeveloped communities also may be eligible for other tax breaks, such as low-income housing, historic and energy incentives.

Is there a final date for investors to place capital into a Qualified Opportunity Fund (QOF)?

No, taxpayers can still invest funds in a QOF after December 31, 2021, hold the investment for 10 years and receive the above mentioned tax benefits. However, the last day to invest and receive the 10% basis step-up, is December 31, 2021, which grants the taxpayer a 10% reduction in the amount of capital gain recognition on the original capital gains.

2. Take advantage of section 179 expensing

Sec. 179 expensing allows businesses to immediately deduct the cost of eligible new or used assets, such as equipment and furniture. You may be able to lower taxable income by accelerating depreciation on assets placed in service before year end. But, remember, it’s not enough to simply purchase these assets by year end; they must be up-and-running in 2021 to qualify for Sec. 179. The Dollar and Investment limitations for 2021 are as follows:

$1.05 million is the Sec. 179 Dollar Limitation for 2021

and $2.62 million is the Investment Limitation.

Example-

In 2021 ABC Co. places $2.9M of eligible S179 property in service. The $1.05M expensing limit is reduced under the investment limitation by $280,000 ($2.9M - $2.62M), and therefore ABC may elect to expense up to $770,000 ($1.05M - $280,000) of the cost of the Sec. 179 property placed in service in 2021. In addition, if ABC elects to expense all $770K under Sec. 179, and ABC’s 2021 taxable income is $600,000, then the Sec. 179 deduction is limited to $600,000 and $170K of Sec. 179 is carried over to 2022.

As an FYI, the projected 2022 Dollar and Investment limitations are $1.08M and $2.7M.

3. Benefit from bonus depreciation

Under the bonus depreciation program, companies can deduct the full cost of certain new and used capital expenditures in the year they’re placed in service. This break isn’t subject to any spending limits or income-based phaseout thresholds. It applies to qualifying property placed in service after September 27, 2017, and before January 1, 2023, at which time the bonus depreciation is reduced by 20% thereafter through 2026. Bonus depreciation will be gradually phased out, unless Congress extends it.

Important: Not all states allow for bonus depreciation or the higher Section 179 limits.

First-Year Bonus Depreciation Percentages

Important: If you expect federal income tax rates to increase under the Biden administration, you may decide to forgo Sec. 179 expensing and bonus depreciation and, instead, depreciate 2021 asset purchases using regular MACRS depreciation schedules. This alternative would increase taxable income in 2021 when tax rates are lower and decrease taxable income in later years when tax rates may be higher. We can help evaluate what’s right for your business.

For more year end planning tips, download our Year End Tax Planning Guides for Businesses and Individuals.

Questions? Contact us.